http://www.mises.org/story/2196
The Case of Government Retirement Programs
by Mark A. Pribonic
Posted on Thursday, June 15, 2006
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I call these programs misdeeds by the political caste because it has been obvious since their inception that there is not enough wealth created to ever sustain them but for a short period of time. The lessons of defined-benefit pensions, which Social Security is the largest example of, have been well documented in the recently revealed financial troubles of the domestic auto companies, airlines, and others. Ignorance of economic law is no excuse.
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Clearly Social Security Insurance is not insurance. Ponzi scheme would be a better description. Insurance company executives would be in jail if they did what the politicians have done. If we think about these benefits as a discounted cash flow, that anyone in an MBA or an undergraduate course knows, then there has to be an asset to balance the teeter totter. The ROI of social security insurance is negative. There is no asset to provide the needed balance. So that bill will come do. There is a reason that business has moved from defined benefit pensions akin to social security. But, the business had to create that pool of assets to pay off its pensioners. Otherwise, the government would send the executives to jail. Note that politicians and professional bureaucrats don't go to jail for the same behavior. What's different? The change from defined benefit to defined contribution plans puts the onus on the employee, not the company.
Clearly, governemt employee pensions are not funded like a company's pension plan. Unfunded liabilities abound in the government. And, we get to make good on these when they come do.
Just as clearly, the chickens are going to come home to roost, and they are going to be big, dirty, and nasty.
Consider when all these unfunded liabilities come due, there are only a few choices to make good on them:
- Increase taxes to stunning levels;
- Decrease benefits to manageable levels;
- Sell off the national treasures;
- Inflate the currency;
- Or, do the unthinkable and renege on the promises.
My bet is for inflation. It's the "quietest tax" on accumulated savings, cash, and fixed incomes. The market will respond to the increased amount of money chasing the same amount of goods. It'll make Carter's 21% inflation look tame. It will be like the German hyperinflation in the 20s.
Reinke Faces Life 